Question 2 10 pts Assume that the following Treasury yield curve is in existence. Time in Time in Coupon YTM Price Years Periods Rate Theoretical Implied Theoretical Semi- Semi- Annual Spot annual Annual forward Spot Rate Rate rate Implied Annual Forward Rates 0.5 1 0.00% 4.50% $97.79951 2.25% 4.50% 2.55022% 5.1004401% 1 2 0.00% 4.80% $95.36743 2.40% 4.80% 4.80000% 6,3514618% Show that the actual futures price (BEY of 4.9%) is incorrect using a zero-cost investment strategy involving the spot market and the futures market. (Of course, if the futures price is correct, this zero cost strategy will also have zero profit.) Show the actual dollar cash flows at time 0 and at the expiration of the futures contract. Time 0: Borrow at the six month spot rate +$ $95,367,43 Buy the one year Treasury bill $ $95,367.43 Net cash flow $0 +$ $95,367.43 Buy the one year Treasury bill > $ $95,367.43 $ Net cash flow $0 Sell the six-month futures contract At expiration in 6 mo: Pay back the loan plus interest $97.513.20 Sell the bond we own to fulfill the futures contract +$ $97.608,59 Net cash flow 1 +$ $95.39 Question 2 10 pts Assume that the following Treasury yield curve is in existence. Time in Time in Coupon YTM Price Years Periods Rate Theoretical Implied Theoretical Semi- Semi- Annual Spot annual Annual forward Spot Rate Rate rate Implied Annual Forward Rates 0.5 1 0.00% 4.50% $97.79951 2.25% 4.50% 2.55022% 5.1004401% 1 2 0.00% 4.80% $95.36743 2.40% 4.80% 4.80000% 6,3514618% Show that the actual futures price (BEY of 4.9%) is incorrect using a zero-cost investment strategy involving the spot market and the futures market. (Of course, if the futures price is correct, this zero cost strategy will also have zero profit.) Show the actual dollar cash flows at time 0 and at the expiration of the futures contract. Time 0: Borrow at the six month spot rate +$ $95,367,43 Buy the one year Treasury bill $ $95,367.43 Net cash flow $0 +$ $95,367.43 Buy the one year Treasury bill > $ $95,367.43 $ Net cash flow $0 Sell the six-month futures contract At expiration in 6 mo: Pay back the loan plus interest $97.513.20 Sell the bond we own to fulfill the futures contract +$ $97.608,59 Net cash flow 1 +$ $95.39